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Lately, the airline sector has been flying and has seen 40% appreciation since the start of the year versus the S&P 500, which has risen only 15%. One of the keys to this growth has been the proactive approach of some carriers that have been investing into new markets. The performance of new markets is of particular interest for carriers that are demonstrating growth, such as Alaska Air Group, Inc. (NYSE:ALK) and JetBlue Airways Corporation (NASDAQ:JBLU), or re-allocating capacity into new markets like Southwest Airlines Co. (NYSE:LUV).

Let’s have a look into how these new markets are developing for those three carriers.

Executive summary

The conventional growth opportunities for Alaska Air Group, Inc. (NYSE:ALK) are off to a weaker start and some Hawaii markets are showing signs of softness, likely as a result of competitive capacity. For JetBlue Airways Corporation (NASDAQ:JBLU), Boston, Hartford, and San Juan continue to screen well. Finally, while Southwest Airlines Co. (NYSE:LUV)’s markets are generally developing inline with expectations, smaller cities look to be out-performing larger cities. Atlanta stands out as a weak start for new Southwest flying (separate from AirTran flying). However, Southwest is addressing this with code-share capability with AirTran and a revamped schedule toward the end of the year.

A bad deal for Alaska

In a note published by Barclays PLC (ADR) (NYSE:BCS), the analyst commented that with the ‘Hawaii void’ filled, Alaska Air Group, Inc. (NYSE:ALK)’s growth will revert to more conventional markets (connecting cities like Seattle and San Diego to other markets.) Those market opportunities would not generate the early relative RASM premiums that Hawaii markets had produced. (For those who don’t know, RASM is revenue per available seat mile and is considered a key metric when discussing revenue growth of airline sector.) Hence, the reversion to conventional growth would be more RASM and margin dilution than Alaska’s growth in past years.

Barclays has given a price target of $38, which is almost a 30% downside from the current price level of $52.

Revenue generation for JetBlue is just okay

JetBlue Airways Corporation (NASDAQ:JBLU)’s new markets in Boston and San Juan appear to be developing well, although San Juan is proving a bit less consistent than Boston. Where we have seen some weakness is in markets with notable competitive capacity pressures (Transcon, for example), and some recent New York to Florida markets that look to be slow in developing.

On an overall note, the carrier’s revenue generation is generally fine. However, the revenue performance has yet to result in relative earnings and margins that match the industry’s improvements. With 10% capital appreciation for the year (vs. S&P 15%), the stock has under-performed the market. However, consensus estimates show a 25% annual increase in earnings for the next five years, which bodes well for the stock.